Consumer spending in the United States unexpectedly dropped in January, signaling potential turbulence for the economy. This downturn is reflected in the Atlanta Federal Reserve’s GDPNow model, which projects a 1.5% decline in GDP for the first quarter of the year. The decline in spending was reported in the Personal Consumption Expenditures report, highlighting a significant shift in consumer behavior. Meanwhile, key indicators of consumer confidence have markedly decreased, with the Conference Board’s consumer confidence index dropping 11 points between December and February, alongside a 9-point drop in the University of Michigan’s consumer sentiment index during the same period.
The 11-point drop in the Conference Board’s index marks the largest decline to start a year since 2009, while the University of Michigan’s sentiment index has hit a record low since its inception in 1978. These figures underscore a growing concern that the US economy is facing what analysts describe as a "growth scare," with projections of economic growth being sharply downgraded.
Consumer spending holds immense significance as it constitutes about two-thirds of the US economy. The recent decline may have far-reaching implications, given its pivotal role in driving economic activity. Historically, the US economy has managed to shake off recession fears, as seen in 2022 and again during the summer of 2024. However, the current economic climate raises questions about whether this resilience will persist.
Adding to these concerns is the escalating uncertainty surrounding tariffs. The threat of higher tariffs is causing unease among American consumers, with confidence metrics deteriorating at an unprecedented pace. The US has imposed a 25% tariff on imported goods from Mexico and Canada and doubled tariffs on goods from China to 20%. In response, China, Mexico, and Canada have vowed to retaliate by imposing their own tariffs on US goods, setting the stage for a potential trade war within North America.
Jay Foreman, CEO of toy company Basic Fun!, expressed concern over these developments. His company faces financial strain due to existing contracts that compel them to absorb additional tariff costs. Foreman estimates that an additional 10% tariff could create "another $5 million gap" in Basic Fun!'s finances.
"Every plan we have to mitigate a 10% tariff is not workable based on a 20% tariff," said Jay Foreman.
Foreman's predicament highlights the broader challenges faced by industries reliant on international supply chains. Many goods, including toys, cannot be easily or cost-effectively produced domestically.
"There are things you aren’t able to physically produce here, and toys is one of those," Foreman added.
Economists are closely monitoring these developments, with some suggesting that the current situation may be temporary. Ed Yardeni, a seasoned economist, commented on the potential longevity of this economic downturn.
"It’s a soft patch. I don’t think it’s going to last very long," remarked Ed Yardeni.
Despite his optimism for a short-lived downturn, Yardeni cautioned against prolonged exposure to tariff-related issues.
"Tariffs are a toxic area. You don’t want to stay there too long," he warned.